Bravo Larry Fink.
When the person who heads a $7 trillion investment firm will now make investment decisions based on a company's commitment to environmental sustainability, you can bet the financial world will never be the same again.
That's exactly what the CEO of the incredibly important BlackRock (BLK) investment firm calls out in his annual letter to executives. Things will never be the same. From now on, a company that can't prove it regards the earth as a stakeholder is liable to get a lower price-to-earnings multiple than one that doesn't. I cannot stress how important Fink's move is. Way too often, company managements and their shareholders and the people who opine on earnings simply don't talk enough or care enough about the important.
There's a lot of lip service.
There's a lot of "we wish we could do more" and "we have to do more."
That ended today. Sure, as Fink wrote, "awareness is rapidly changing." And "the evidence on climate risk is compelling investors to reassess core assumptions about modern finance." But those of us who feel strongly about this issue have lacked a champion.
Fink doesn't just manage the most money. He also holds the moral high ground and is revered by almost every CEO I have ever asked after. He was self-effacing and emotional in his amazing interview with CNBC's Andrew Ross Sorkin, but his rigor is never in doubt. Again: "The evidence on climate risk is compelling investors to reassess core assumptions about modern finance."
That comment, right there, says "we don't care if you don't believe in climate change, we will punish your stock if you don't."
Fink will be introducing funds that will avoid fossil-fuel-oriented companies. His firm will take to task those that don't do enough, something that could lead to some very high-profile proxy fights.
I scrutinize hundreds of companies looking for this commitment and try to address them in every interview of every CEO. It's necessary. Even if you don't believe in the issues -- and I do wholeheartedly -- you will have to care if you want to buy stocks that have a greater propensity to go up than others that don't.
I often joke about how extraneous issues can't often be factored into what you will pay for a stock, cavalierly saying -- just for effect -- "what does that have to do with the price-to-earnings ratio of Bristol-Myers Squibb (BMY) ?" I was contemptuous of anything that didn't directly relate to earnings because I was gaming fund managers and those fund managers didn't care, so why should I care.
But after today, that's no longer the case. Boards will now ask CEOs what are they doing to help save the Earth. Big investors like Fink will insist on knowing what a company's plan is to address climate change. Fund managers will begin to sell the stocks of those companies that ignore these issues. Companies will be forced to pay executives bonuses for what they are doing to reduce the footprint, the way the forward-thinking Clorox (CLX) already does.
Fink's actions remind me very much of the divestment move against companies that did business with South Africa during the Apartheid years. Many of us protested against universities that bought the stocks of companies that supported that criminal regime for their endowment. Initially, we were addressed as dreamers with a Quixotic streak. But as the years went on, the movement gained steam and the target companies ultimately felt they had to abandon that lucrative market if they wanted their stocks to go higher.
Fink's giving companies the cover they need to roll up their sleeves and give up policies that hurt the environment or suffer selling at the hands of not just endowments but the Finks of the world.
The investment firmament will never be the same after Fink's bravery. Some may say "it's about time." I say congratulations for throwing your heft behind an issue that so many care about, but few felt the need to do something serious about, because it could hurt earnings. Now what will we pay for these earnings is in the balance because of the Earth. Bold and necessary, thank you Mr. Fink.